Michael Decter is president and CEO of LDIC Inc. His focus is on Canadian large caps.
The midstream company's high percentage of marketing fee exposure from its non-oil liquid sales, specifically propane price weakness this past winter, has been the reason for cash flow and share price volatility after hitting $50 in January. At current levels we like the upside in Keyera as the stock offers a compelling 4.8 per cent yield, and 22 per cent operating cash flow growth into 2013 which for a midstream operator is very robust.
A fairly new oil focused E&P is already producing 9,000 barrels per day, up more than 50 per cent since last year, and on track to achieve 2012 exit rate of 11,000 barrels per day which should translate into cash flow growth of over 60 per cent given the high operating netbacks approaching $40/b. Surge utilizes modern recovery techniques to enhance recoveries from large oil in place pools which carry less risk compared to exploration focused peers. A strong balance sheet provides the company with the financial capacity to fund its growth initiatives at its ever growing drilling location inventory (435 net).
The company continues to deliver steady earnings growth of roughly 20 per cent per year as it consistently adds long term chemical handling contracts with blue chip companies. 2012 first-quarter earnings were a record for the company up 77 per cent year over year as a result of past investments in expansion that started contributing to the business in mid-2011. Indicated Yield 6.7 per cent.
Past Picks: May 16, 2011
Total return: -8.71%
Provident Energy (Acquired by Pembina Pipeline Corp. in April 2012)
Total return: +55.45%
Total return: -42.67%
Total Return Average: +0.69%
For the remainder of 2012 we believe equities will provide healthy returns, specifically Canadian based companies focused in energy and domestic markets. Many companies with sound balance sheets have access to low cost debt and should be able to peruse growth opportunities now that the U.S. economy has stabilized. Not all is rosy however. The highly indebted European countries will continue to be a drag on the global economy thus we believe stock selection will be important. A slowing China remains a risk, but given the array of tools it has at its disposal to re-stimulate its economy we are less concerned and would not be surprised if we saw some form of stimulus by the Chinese government in the second half of the year. Going forward we believe that once the government changes in Europe are digested, further global stimulus along with prolonged low interest rates will lead to stable if not positive economic activity.
Compiled by Rob Moysey, BNN Market Call Tonight